Trust registration enhanced as 5th money laundering directive takes effect
Clients and advisers are already expressing concern about the extensions to the requirements to register beneficial owners of trusts. Julia Penny looks at the practical implications of this change following the new 5th money laundering directive.
Practising accountants will no doubt feel they are familiar with the requirements of the various regulations and guidance that implement the EU money laundering directives.
But of course, time (and more importantly, in this case, regulation) never stands still and we now have the 5th Money Laundering Directive (MLD), which took effect on 10 January 2020, to implement.
Fortunately, this is an amending directive rather than anything more substantial and some of the changes are to increase the scope of those in the regulated sector, so don’t have too much of an impact for accountants.
However, of bigger concern to clients and therefore their advisers, are the extensions to the requirements to register beneficial owners of trusts.
The drive to create and then enhance registers of beneficial owners is to make it easier for law enforcement to understand who the ultimate owner or controller of property is. With no transparency of ownership, it becomes child’s play to hide behind corporate or trust structures. Some of this “hiding” is merely a desire to protect the privacy of the ultimate owners, but those with the proceeds of crime to disguise have the utmost incentive to hide behind whatever mechanisms they can find.
Under the 4th MLD trusts with tax consequences are required to register with the Trust Registration Service (TRS), but the 5th MLD extends this to express trusts, where there is no tax consequence. The Financial Action Task Force (FATF) defines an express trust as:
“One clearly created by the settlor, usually in the form of a document, such as a written deed of trust.”
Fortunately, the directive takes a risk-based approach, so a government can decide that, although a trust may be express, the risk of money laundering and terrorist financing is low and therefore it does not need registering.
The question then is which extra trusts will need to be registered and how should this happen? At the time of writing the detailed requirements are still under consultation. However, the proposals are that all trusts within scope that were in existence on 10 March 2020, will be required to register by 10 March 2022. New trusts formed after 10 March 2020 will be required to register either within 30 days of formation or by 10 March 2022, whichever is later.
Now it might seem that you, therefore, have lots of time and can forget about this issue until nearer the deadlines. However, before you put this to the bottom of your to-do list, have a think about the work which will be required leading up to the deadline as considered in the next section.
Areas to consider in planning for these changes include:
- Identification of affected trusts (once final legislation is available)
- Communication with trustees regarding the changes
- Gathering the information required for registration in a secure manner
- Considering internal processes, including assessment of any new software which may become available
- Updating your anti-money laundering procedures
- Training staff on the new procedures
Which trusts will be included?
As already discussed, it is express trusts which will have to register, but there are exemptions proposed where the risks of money laundering and terrorist financing are deemed low. The exemptions include:
- Statutory trusts, such as tenants’ service charge trusts
- Trusts which merely allow co-ownership of assets
- Certain trusts required to be set up in a particular way, for example: personal injury trusts
- Some pension and charitable trusts, where already regulated
A bare necessity?
One area of concern is the current requirement in the draft legislation that bare trusts will be required to register, albeit the government is investigating this further. Bare trusts exist where the beneficiary has the absolute right to the assets of the trust (once they are 18) and the trustee must manage the trust to get the maximum benefit, or as directed by the beneficiary, but cannot decide themselves how capital and income are distributed.
Many situations arise where a relative is acting as a trustee of a bare trust, without realising a trust exists. Often these trust situations look after assets for minors or elderly relatives where the risks are low. It is felt that most EU members will not require the registration of bare trusts and so it could put the UK at a competitive disadvantage were we to do so.
According to the consultation non-UK express trusts will be required to register in the UK if they are administered here by virtue of having one or more UK trustee. However, the draft legislation (s45ZA(b)) includes all non-UK trusts who enter into a business relationship in the UK with a relevant person or acquire an interest in land in the UK. There is a risk that merely appointing a UK adviser will generate a TRS registration requirement for an offshore trust.
Privacy and competitiveness concerns
A number of issues have been identified by ICAEW in its response to the consultation and no doubt others have similar concerns. These centre around:
- The breadth of trusts required to register and a lack of clarity in some of the rules.
- The privacy concerns associated with “legitimate interest” disclosure requests which are not currently limited to law enforcement agencies.
- The risk that the UK will be regarded as an unattractive place to hold assets or to engage an adviser, due to privacy and safety concerns.
Whilst there are some final details still to be clarified, this change will be significant and requires some preparation to ensure you are ready when the changes impact. Further information is likely to be posted on the consultation webpage.
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Julia Penny is the principal of JS Penny Ltd which provides technical and training consulting on anti-money laundering procedures, auditing and financial reporting. Julia is a member of ICAEW Board and Council, chair of the ICAEW Ethics Advisory Committee and past chair of the ICAEW...